Congressional and administrative proposals are failing to address the underlying incentives driving inversions and therefore, putting 42,000 U.S. jobs at risk of going overseas, according to new research from the American Action Forum (AAF), a center-right think tank. The AAF study, released on September 4, also found that the federal tax code risks sending $988 billion in U.S.-based capital overseas.

“As long as foreign markets continue to grow, and the U.S. maintains a comparatively uncompetitive code, the incentive to relocate headquarters abroad will remain. Worse, recent policy proposals that ignore this reality will further harm U.S. competitiveness and jobs,” said the AAF’s Director of Fiscal Policy Gordon Gray.

Placing a value on the potential equity flight is uncertain, according to Gray, but based on his estimates, roughly 15 percent, or $988 billion in U.S.-based capital, is at risk of moving overseas.” To the extent this economic inducement remains by maintaining the current tax code, anti-inversion laws that include management and control tests would push the capital overseas and headquarters jobs would follow suit,” stated Gray. The largest American firms have nearly 299,000 headquarters employees, many of which would be at risk for having their positions relocated abroad. If roughly 15 percent of U.S.-based market capital is at risk, it suggests a proportional overseas relocation of 42,000 U.S. jobs, the study determined.

The president’s fiscal year (FY) 2015 budget, and the House and Senate have all proposed measures that they argue would staunch such expatriations. Among other provisions, these proposals would reduce the proportion of corporate shares that a U.S. company may own of a foreign entity to be considered as a foreign-domiciled firm. At present, this stands at 80 percent, while these proposals would reduce it to 50 percent. As a result, if, under an expatriation transaction, the original shareholders have a majority stake in the foreign, top-tier corporation, that corporation is viewed as a domestic corporation for tax purposes. “It is important to note that Sen. [Carl] Levin’s, D-Mich., measures sunsets after two years, nominally to provide political “room” for comprehensive tax reform, which is at least a tacit acknowledgment that the U.S. code may ultimately be at fault for these expatriations,” said Gray.

These proposals also share a key feature related to management and control that would ultimately create incentives for shipping corporate headquarters jobs overseas, according to the study. All of these proposals would add a management and control test to the determination of the tax treatment of a firm. Specifically, as the administration notes, “a special rule whereby, regardless of the level of shareholder continuity, an inversion transaction will occur if the affiliated group that includes the foreign corporation has substantial business activities in the United States and the foreign corporation is primarily managed and controlled in the United States.” In essence, if a firm keeps its headquarters in the United States, and continues to do significant business in the States, it will be taxed as a U.S. firm. To the extent the U.S. tax code otherwise creates incentives for these firms to expatriate, this test will push these firms a step further—shipping their headquarters offshore, concluded the AAF.

Leave a Reply

By signing up for our monthly newsletter, you will stay informed with the changes to the tax laws that occurred that month as well as what is going on with our firm. We will share with you any client successes, community involvement and events, etc. We see you as part of our family and want to keep in touch.
Sign up here →